So-called “prediction markets” have recently started to pop up in the news for all sorts of reasons. Here’s what they actually do, and why big tech investor Cathie Wood thinks they could change investing forever.
What is a “prediction market”?
A prediction market is an exchange where you trade contracts on whether a specific thing will happen by a specific date. Each contract pays out a fixed amount if the event happens, and nothing at all if it doesn’t.
That fixed payout is key: if a contract is trading at 30 cents, buyers are collectively saying there is roughly a 30% chance of the event occurring. Pay 30 cents, collect a dollar if you’re right, lose the 30 cents if you’re wrong. The price is a probability with a dollar sign in front of it.
Right now, it’s technically online bookmaking with a twist. But two things separate prediction markets from a bet with a bookmaker. The odds are not set by the house: they move continuously as buyers and sellers trade against each other, and the exchange takes a fee rather than a position. And you don’t have to wait for the result. You can sell your contract at any point before the event resolves, at whatever the price has moved to, the same way you would exit a share.
The output is a live, constantly updating market estimate of how likely something is to happen. In the United States these contracts are regulated as derivatives, which is why they sit with the Commodity Futures Trading Commission rather than the corporate regulator.
Enter Kalshi
Cathie Wood, founder and chief investment officer of tech investment giant ARK Invest, recently spoke to Peter Switzer on the Switzer Show about a range of issues, including prediction markets.
Wood referenced are multiple players in the space, but added that she’s backing one named Kalshi via the ARK Venture Fund. She says its positioned to win thanks to its regulatory positioning as well as its tech.
“Kalshi has also been very careful in the United States to work with the regulators, and only move forward when it had regulatory clearance, or enough regulatory clearance, to move. So it has been dominated by sports, and these prediction markets are regulated by…the Commodity Futures Trading Commission,” she explained.
That caution is why she thinks its main international rival – Polymarket – has struggled in the same market.
“Polymarket’s having trouble cracking into the US because it did not do so in as regulatorily thoughtful a way as Kalshi has.”
The business story underneath is a near-death experience. Kalshi’s contracts were distributed through Robinhood, which Wood says accounted for about 60% of its volume. Robinhood then announced it would launch a competing product of its own.
“Many people thought Kalshi would be dead. We did not.”
What saved it, Wood says, was the most-recent World Cup (of which Kalshi sponsored), which she said “exploded Kalshi in the United States”. She believes the company’s most recent round values it at roughly double what ARK paid if her memory served.
How prediction markets could change investing
While prediction markets have found a niche amongst sports betters, bats and balls aren’t going to be Kalshi’s stock and trade forever, says Wood. She argues that the same machinery that powers Kalshi, pointed at companies instead of sports and politics, breaks their performance into separately tradeable questions. She reached for Tesla as the example.
“Just let’s say, when will Tesla’s robotaxis be in half of the United States? And then it will give you choices. Or how many states will Tesla’s robotaxis be in by December, by the end of the year? And so they’ll set up a market where anyone can bet on this.”
Instead of one share price bundling every question about a company into a single number, you get a price on each question. Wood calls that unbundling, and she thinks it will pull scattered knowledge into public view.
She adds that such a shift in prediction markets could reclaim derivatives markets back from so-called ‘high-frequency trading’ bots and algorithms that execute trades in split-seconds.
“What has happened to our markets in the United States, maybe in Australia as well, is they’ve been overtaken by algorithms and high-frequency trading, and they’ve moved much more passive… you get game playing around benchmarks, not real investing. This is an opportunity for real investing, like when I started in the business in the late 70s, early 80s, when there were no computers, and investors and analysts really had to think through what the future might hold.
“It’s going to be an incredible hedging market. And so we believe it could scale to the size the derivatives markets are, which is trillions and trillions of dollars of trading per day.”
Kalshi is a holding of the ARK Venture Fund, which is managed by Cathie Wood’s firm ARK Invest.
This article does not take into account the investment objectives, financial situation or particular needs of any individual. It does not constitute formal advice. Past performance is not a reliable indicator of future performance.
